Bonuses and Promotion Tournaments: Theory and Evidence

Abstract

Standard models of promotion tournaments do not distinguish between wages and bonuses and thus cannot explain variation in the use of bonuses. We combine classic and market-based tournament theories to develop a model in which wages and bonuses serve distinctly different roles. We use this model to derive testable predictions which we test employing both a single firm data set and a data set encompassing a large segment of the Finnish economy. Our empirical analysis supports the testable predictions and shows that our theoretical approach better matches the data than alternative theories of bonus determination based on arguments already in the literature.

Promotions and the Peter Principle

“…In Table VII, columns (4) and (5), we find that firms with relatively strong pay for performance tend to implement promotion policies that are less sensitive to worker sales performance and more sensitive to collaboration experience. This is consistent with the idea that pay-forperformance incentives can partially offset the need to provide promotion based-incentives, as discussed in Ekinci, Kauhanen, and Waldman (2018). However, pay for performance may be an expensive substitute for promotion-based incentives, especially if workers value the security, stature (e.g., Larkin 2011; DellaVigna and Pope 2016), or external signaling abilities associated with promotions (Waldman 1984a;DeVaro and Waldman 2012).…”

Responding to Regulation: The Effects of Changes in Mandatory Retirement Laws on Firm-Provided Incentives

“…Finally, this paper contributes to recent work on the use of multiple incentives by firms (Frederiksen and Takáts 2011;Ekinci et al forthcoming) yet extends our understanding of firm use of incentives even further. Namely, it provides compelling empirical evidence that firms consider and use total incentives faced by employees (pay and promotion).…”

Getting along to get ahead: The role of social context in tournament promotion and reward systems

“…Similarly, individuals may alter or manipulate performance information [e.g., through impression management; 17 ] in an attempt to make themselves appear more favorable relative to their competitors, regardless of the consequences to the organization [ 18 – 20 ]. Taken together, because the winners of tournaments receive promotions and disproportionately large amounts of pay increases or bonuses, incentives exist to motivate individuals to win at all costs despite the potentially adverse effects on their peers and the organization [ 21 ].…”